Question

Bearskin rugs needs $115 million to build a new distribution center. if it issues common stock to raise the funds, the issuance costs will be 8 percent of the total amount issued. if bearskin can issue stock at $40 per share, how many shares of common stock must be issued so that it has $115 million after flotation costs to fund the construction of its distribution center?

Answer 1

Bearskin Rugs must issue 3,125,000 shares of common stock at $40 per share to raise $115 million after accounting for an 8% flotation cost, totaling $125 million needed before costs.

Step-by-step explanation:

To calculate the number of shares of common stock that Bearskin Rugs must issue to raise $115 million after flotation costs, we must first determine the total amount that needs to be raised before accounting for the 8% issuance costs. Since the flotation costs are 8% of the total amount issued, the company needs to raise $115 million divided by (1 - 0.08), which amounts to $125 million.

Next, we divide the total amount to be raised before issuance costs by the price per share to find the number of shares needed. So, the company will need to issue $125 million divided by $40 per share, which equals 3,125,000 shares. Therefore, Bearskin Rugs must issue 3,125,000 shares of common stock at $40 each to have $115 million after accounting for flotation costs to fund the construction of its new distribution center.